VFH vs VFAIX

The Vanguard Financials Index Fund (Admiral Shares) (symbol VFAIX) and the Vanguard Financials ETF (symbol VFH) are two of the largest and most popular financial sector index funds. Some compare VFAIX vs VFH not realizing that they are just two different share classes of the same portfolio.

A quick reminder that this site does NOT provide investment recommendations. Fund comparisons (such as this one) are not conducted to identify the “best” fund (since that will vary from investor to investor based on investor-specific factors). Rather, these fund comparison posts are designed to identify and distinguish between the fund details that matter versus the ones that don’t.

The Short Answer

VFAIX and VFH are different share classes of the same portfolio, which is made possible by Vanguard’s ETF share class structure. The decision to buy one or the other depends on investor-specific factors (some of which are listed below).

The Longer Answer

Vanguard ETFs are structured as share classes of their mutual funds. This is a patented structure that is scheduled to expire in 2023, so we may see this structure more frequently in the near future. In other words, VFAIX and VFH are not two funds pursuing an identical strategy; they are the same fund!

Historical Performance: VFAIX vs VFH

VFH was launched on January 26, 2004, while VFAIX was launched on February 4, 2004. Since the common inception date (the latter of the two inception dates), performance has been identical; both funds have returned 4.94% annually! Despite changes in fees and expenses over this time period, there is less than a .1% percent difference in cumulative performance since inception! Looking at the chart of VFAIX vs VFH below, it is obvious that they are identical.

Differences Between VFAIX and VFH

Since the two funds are actually two share classes of the same fund, I will skip the usual comparisons here. The geographic exposures, sector weights, market cap coverage so on is identical because the two funds are shares in the same portfolio. There are some resources on the internet indicating otherwise, but these are incorrect.

Some investors may point out that the expense ratios between Vanguard’s Admiral Shares and Vanguard’s ETFs differ. This is true, but it is also reflected in the net performance chart above. At a certain level, differences in expense ration do not matter. A small absolute difference (in basis points) is essentially meaningless (even if it appears large on a percentage basis) and is often smaller than the bid-ask spread (see transaction costs below). Expenses do matter, but I would not sweat infinitesimally small differences (and they’ll show up in net performance anyways).

Factors to Consider

Transaction Costs

ETFs are free to trade at many brokers and custodians, including Vanguard. However, many brokers and custodians still charge commissions and/or transaction fees to buy/sell mutual funds. To my knowledge, Vanguard does not participate in the pay-to-play arrangements that would allow their mutual funds to trade for free on many platforms. So if an investor account is at Vanguard, it is free to trade VFAIX or VFH. However, only VFH is free to trade in non-Vanguard accounts.

There is a bid-ask spread when trading ETFs, but this spread is typically less than .03% for VFH and individual investor trades will not generally be large enough to “move” the market. In the case of VFH, individual investors should not have a problem trading.

Tax Efficiency & Capital Gain Distributions

ETFs are typically more tax-efficient than mutual funds, due to their ability to avoid realizing capital gains through like-kind redemptions (a process that is beyond the scope of this post). However, since Vanguard ETFs are a share class of their mutual funds, the mutual funds are able to benefit from this feature of the ETF. In other words, VFH is able to extend its tax benefits to VFAIX. A more in-depth explanation of Vanguard mutual fund tax-efficiency can be found here.

VFAIX has never paid a capital gain distribution! I noticed some posts on the internet saying that VFH is more tax-efficient than VFAIX, but this incorrect as neither fund has ever made a capital gains distribution.

Tax Loss Harvesting

My personal preference is to keep a portfolio entirely mutual funds or entirely ETFs, due to the mechanics of settlement during tax loss harvesting. If an ETF has declined in value and an investor sells it, the trade and cash proceeds will not settle for two business days (T+2). That investor may want to “replace” the sold ETF immediately and attempt to buy another ETF or mutual fund simultaneously.

However, mutual funds settle on T+1 basis, so cash for the mutual purchase would be due in one business day (which is one day earlier than the cash from the ETF sale is received). This can obviously cause problems and (even though this issue can be addressed with careful planning) I find it easier to keep accounts invested in similar vehicles. In this case, if a portfolio is all mutual funds, I might lean more towards VFAIX. If all ETFs, I might lean more towards VFH.

On this topic, investors should probably avoid using these two funds as tax loss harvesting substitutes for one another since they would likely be considered “substantially identical.”

Tradability

VFAIX does have a stated minimum initial purchase of $100,000, so that may be a factor for some investors looking to initiate a position. The minimum purchase size for VFH is typically one share, although fractional shares are becoming more common.

Investors can trade ETFs intraday, as well as in the pre-market and after-hours trading sessions. Investors can only buy/sell mutual funds once per day. This is not necessarily a major factor for long-term investors however.

Final Thoughts: VFAIX vs VFH

VFAIX and VFH are literally the same. However, investors should consider the above factors when deciding which one is best for them.

Posted by Matt

Matt is an investor and investment adviser. He is a CFA charterholder and a CAIA charterholder. His writing on this site is purely educational; he will not make recommendations on this site since he does not know individual readers' situations.